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Belgium and Spanish IFA
Branches Meeting
General guidelines of Spanish Tax Treatment of Expatriate Taxpayers. Outbound Immigration.
Madrid, May 30th 2014
2
Index
Introduction:
Rationale of executive’s expatriation.
Main challenges inherent to executive’s expatriation.
Tax residency: specific issues related to outbound expatriation.
Concept of tax residence (remainder).
Conflicts of tax residence.
Planning opportunities.
“Tax incentives” related to expatriation under Spanish Personal Income Tax
legal framework:
Exemption for work performed abroad.
“Excess regime”.
Payments to non resident employees.
Introduction: rationale and main
challenges inherent to
executive’s expatriation
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Introduction: rationale of executive’s expatriation
From the company’s viewpoint:
Guarantee the strategic control of affiliated entities.
Flow of company’s expertise (business “know-how”).
Compensate the lack of “local” management.
Necessary step in the training process of executives.
International development of executive’s career.
From the executive’s viewpoint:
International development of his career.
New professional experiences.
Better economic / compensation conditions.
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Introduction: main challenges inherent to
executive’s expatriation
From the company’s viewpoint:
Cost of expatriation (company / individual; equalization schemes).
Adequate profile recruitment.
Design and monitorization of the expatriate’s professional career.
“Back home…”
From the executive’s viewpoint:
Problems associated with social / company integration.
Family concerns.
Spouse’s professional development in the country of destination.
Cultural adaptation.
“Back home”…
Tax residency: specific issues
related to outbound expatriation
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Concept of tax residence – remainder (I)
Under Spanish law, individuals are deemed to be tax resident in Spain for Personal Income Tax
purposes if they habitually reside within the Spanish territory.
In this connection, an individual is deemed to habitually reside in Spain when:
He has been physically present in Spain for more than 183 days in a calendar year. (Please note in this
connection that for Personal Income Tax purposes, the fiscal year is the calendar year, i.e. January 1 to
December 31).
His main centre of professional or business activities or economic interests is located in Spain.
Basic consequences of the “tax residence status” analysis:
Resident tax payers are subject to taxation in Spain, as a general rule, on income earned on a world-wide basis
(progressive tax rates ranging up to 56%, in certain regions).
Non-resident tax payers are only subject to taxation in Spain on “Spanish-sourced” income (24.75% flat rate on
gross employment income, as a general rule).
The concept of “residence” for tax purposes is different from nationality / citizenship, residence for
Exchange control purposes, etc.
Spanish tax residence status is maintained in cases where individuals move their (tax) residence to
countries or territories defined as tax havens.
In these specific cases, Spanish tax residency is kept in the fiscal year of effective expatriation and the
subsequent following four fiscal years.
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Concept of tax residence (II)
It is not possible, under current legal framework, to “split” a fiscal year as a
consequence of expatriation.
There are not detailed rules governing specific / practical aspects related to
the “183 day- computation test”.
In the absence of proof to the contrary, an individual is presumed to be
habitually resident in Spain if his spouse and dependent children are resident
in Spain.
Sporadic absences are ignored for the purposes of the “183 day- computation
test”, unless the individual can prove that he was tax resident in another
country during the calendar year.
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Conflicts of tax residence
Conflict of tax residence are generated when an individual is considered tax
resident in two different territories for the same tax period.
Tax legislations of different countries contain “broad” definitions of tax residence in
order to “attract” taxation of employment income to their respective jurisdictions.
Example: US citizen (tax resident in the US based on nationality / citizenship status)
who is present in Spain in a fiscal year for more than 183 days (tax resident in Spain
base on the 183-day rule).
As a result of a conflict of residence, double (international) taxation may
arise: two different States treat as tax resident to the same individual, for the
same fiscal period and the same income.
Legal mechanisms to mitigate double (international) taxation:
Domestic provisions.
Tax Treaties.
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Planning opportunities
Carefully program / monitor (on a case by case basis) the tax residence
status of expatriates, particularly in the “entry / exit” fiscal years.
Planning of the circumstances / effective date of expatriation:
Effective exit from the Spanish territory after July 2: resident in Spain for the whole
fiscal year.
Effective exit from the Spanish territory before July 2: non resident in Spain in the
fiscal year of exit (e. g. international assignment).
Taxation of employment income earned by a resident individual; access /
availability of certain “tax incentives”:
Exemption of taxation for work performed abroad.
Non taxation in Spain of certain additional allowances received by the expatriate as
a consequence of the international assignment.
Taxation of employment income earned by non resident individuals:
For work effectively performed in Spain: 24,75% on gross income.
For work performed abroad: Non taxable.
“Tax incentives” related to
expatriation under Spanish
Personal Income Tax legal
framework
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Exemption for work performed abroad (I)
Exemption from taxation of employment income earned by resident tax
payers so long as the following conditions are met (article 7 p) of Spanish
Personal Income Tax Law and article 6 of the Regulations):
The income qualifies as employment income and is earned in connection with
services rendered in a foreign country.
The work is performed for a company or entity which is non resident in Spain for
Spanish tax purposes or for a permanent establishment located in a foreign country;
In case related entities are involved (employer entity – entity recipient of the
services performed by the expatriate) certain transfer pricing requirements
must be observed (need to “recharge” intra group services – the services
rendered by the employee generate “added value” to the recipient entity).
In the territory where the work is performed, a tax of identical or analogous nature to
Spanish Personal Income Tax is applied, and the territory is not considered as a tax
heaven.
Limit of the exempt amount: € 60,100 per year for income during fiscal year in
question. “Proportionate” rules apply to determine / calculate the exempt amount.
Incentive not compatible with the “excess regime” (to be discussed in a later stage)
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Exemption for work performed abroad (II)
Practical application of the incentive: possibility to tax employment income in
the country where the activities are performed at lower rates than the
(maximum / marginal) 56% rate:
Examples of countries where this incentive could be applicable (host country
with tax treaty with Spain containing the “imputation” clause as method to
avoid double taxation) (1):
(1) Tentative tax rates
BRAZIL
PORTUGAL
TAX RATE
23% - 43%
50%
25% 34%
21.5%
BELGIUM
ITALY
TAX RATE COUNTRY COUNTRY
USA 39,6%
NORWAY 27% - 39%
ECUADOR 22%
VENEZUELA
KAZAKHSTAN 10% BOLIVIA 13%
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Exemption for work performed abroad (III)
Examples of countries with which Spain has concluded a tax treaty containing
the “exemption with progression” clause as method to avoid double taxation
and thus, the € 60,100 threshold is not applicable in practice:
CHEZCK REPUBLIC
TAX RATE
SLOVAKIA
52%
19% - 25%
15% - 22% THE NETHERLANDS
TAX RATE COUNTRY COUNTRY
18% - 32% POLAND
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Exemption for work performed abroad (IV)
Example (case 1)
Services rendered both in Spain and in country B
Employment income earned in connection with activity in country B
subject to taxation in said country (e.g. 25% flat tax rate on gross income)
Article 7 p) not applicable.
Executive. Age 48. Married and with two children.
Total Cash compensation € 120,000.00
- Spanish activity: € 80,000.00
- Foreign activity: € 40,000.00
Taxes paid in country B: (€ 10,000.00)
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Exemption for work performed abroad (V)
Case 1: Taxation in Spain (2013 tax rates - Madrid)
Total cash compensation: 120,000,00 Social Security: (2,610.48) Labour activities allowance: (2,652.00) Net employment income: 114,737.52 Joint return allowance: (3,400.00) Taxable base: 111,337.52 Tax liability: 41,946.25 Foreign tax credit: (10,000.00) Final Tax liability in Spain: 31,946.25 Tax liability in country B: 10,000.00 Total tax cost: 41,946,25
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Exemption for work performed abroad (VI)
Example (case 2)
Services rendered both in Spain and in country B
Employment income earned in connection with activity in country B
subject to taxation in said country (e.g. 25% flat tax rate on gross income)
Article 7 p) applicable.
Executive. Age 48. Married and with two children.
Total Cash compensation € 120,000.00
- Spanish activity: € 80,000.00
- Foreign activity: € 40,000.00
Taxes paid in country B: (€ 10,000.00)
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Exemption for work performed abroad (VII)
Case 2: Taxation in Spain (2013 tax rates - Madrid)
Total cash compensation: 80,000.00 Social Security: (2,610.48) Labour activities allowance: (2,652.00) Net employment income: 74,737.52 Joint return allowance: (3,400.00) Taxable base: 71,337,52 Final tax liability in Spain: 23,186.25 Tax liability in country B: 10,000.00 Total tax cost: 33,186.25
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Exemption for work performed abroad (VIII)
Example (case 3)
Services rendered both in Spain and in country B
Employment income earned in connection with activity in country B NOT
subject to taxation in said country
Article 7 p) applicable.
Executive. Age 48. Married and with two children.
Total Cash compensation € 120,000.00
- Spanish activity: € 80,000.00
- Foreign activity: € 40,000.00
Taxes paid in country B: nil
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Exemption for work performed abroad (IX)
Case 3: Taxation in Spain (2013 tax rates - Madrid)
Total cash compensation: 80,000.00 Social Security: (2,610.48) Labour activities allowance: (2,652.00) Net employment income: 74,737.52 Joint return allowance: (3,400.00) Taxable base: 71,337.52 Final tax liability in Spain: 23,186.25 Tax liability in country B: nil Total tax cost: 23,186,25
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Exemption for work performed abroad (X)
POTENTIAL TAX SAVING € 8,760,00 - - - € 18,760,00
CASE 1
Taxes paid
Spain: € 31,946.25
Country B: € 10,000.00
Total: € 41,946.25
CASE 2
Taxes paid
Spain: € 23,186.25
Country B: € 10,000.00
Total: € 33,186.25
CASE 3
Taxes paid
Spain: € 23,186,25
Country B: nil
Total: € 23,186.25
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“Excess regime”
Non taxation in Spain of certain additional allowances received by the
employee as a consequence of an international assignment (the “so called
“excess regime” – article 9.A.3.b.4 of Spanish Personal Income Tax
Regulations):
The employee must “keep” is tax residence status in Spain.
Non taxable amount: excess over the “normal” compensation items the
individual would had received, has he stayed in the Spanish territory
(“qualitative” incentive vs. “quantitative exemption”).
Incentive not compatible with the exemption for work performed abroad (€
60,100 exemption).
Applicable even in cases of assignments to “tax havens”.
Concept of international assignment and potential time limitations.
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Payments to non-resident employees
Not subject to taxation in Spain under Spanish Non Resident Tax Legislation,
to the extent that:
Employment income corresponds to work effectively performed outside
the Spanish territory.
Sufficient evidence of the non resident status of the individual is granted.
Proof of non residence status: practical problems.
Thanks!
Madrid, May 30th 2014
